What Is a Refinance Wave?

A refinance wave occurs when a shift in interest rates prompts homeowners to refinance their mortgages in increased numbers. As interest rates fall, the number of mortgage loan refinances usually increase as homeowners take out new 澳洲幸运5开奖号码历史查询:mortgage loans at lower rates t🌄o pay off their existing, higher-rate loans.

While there's no specific metric for determining what constitutes a wave, homeowners, investors, and real estate professionals watch for signs of a refinance wave when interest rates change. For example, the most recent refinance wave occurred as interest rates plummeted during the pandemic. More than 18 million homeowners refinanced their homes between the fourth quarter of 2019 and first quarter 2022, according to the Urban Institute.

Understanding Refinance Waves

A decline in interest rates often triggers refinance waves. Lower rates can be caused by a number of factors, including when the United States 澳洲幸运5开奖号码历史查询:Federal Reserve cuts interest rates. Although the Fed usually cuts 澳洲幸运5开奖号码历史查询:short-term rates, longer-term rates, including mortgage rates, tend to move down as well, although not by the same amount. The result can lead to a rush of homeowners reaching out to 澳洲幸运5开奖号码历史查询:mortgage refinance companies to t🃏ake advantageꦆ of lower rates, causing a refinance wave.

Refinancing Fixed-Rate Mortgages

Lower rates may induce homeowners to convert their long-term 澳洲幸运5开奖号码历史查询:fixed-rate mortgage into a lower fixed-rate mortgage. The lower rate leads to a lower monthly payment. Borrowers might also refinance their 30-year fixed-year mortgage into a 澳洲幸运5开奖号码历史查询:15-year fixed-rate loan to pay off the loan sooner.

Adjustable-rate Mortgages (ARMs)

Other borrowers refinance to a lower rate but switch their loan from a long-term fixed rate to a short-term 澳洲幸运5开奖号码历史查询:adjustable-rate mortgage (ARM). This strategy can significantly reduce the number of years remaining on the loan, helping the homeowner own the home outright sooner. Refinancing to an ARM can also reduce the overall amount of 澳洲幸运5开奖号码历史查询:mortgage interest paid out over the life of the loan.

However, if rates rise again, the borrower's rate and payment with an ARM also rise. As a result, a rise in interest rates can also trigger a refinance wave when homeowners with ARMs refinance into fixed-rate mortgages. This strategy helps borrowers avoid continued interest rate increases and secure a steady payment schedule.

Cash-Out Refinance

Some homeowners opt for a 澳洲幸运5开奖号码历史查询:cash-out refinance, which involves taking out a new loan that's larger than the existing loan and taking the difference in cash. In other words, they liquidate some of their 澳洲幸运5开奖号码历史查询:home equity, allowing them to take advantage of an appreciating home value t🔯o help with paying down higher-interest c🐼redit card debt, funding college tuition or a retirement plan, etc.

In a rising-rate environment, the number of cash-out refinances can increase, becoming more predominant than traditional refinances, as homeowners rush to cash out their home's equity before rates rise too much.

Refinance Waves and Refinancing Costs

Generally speaking, fixed-rate loans are most attractive when interest rates are low because the monthly payments against principal and interest are locked in for the life of the loan and won't increase even when interest rates rise.

Adjustable-rate loans are at the mercy of interest rate fluctuations, which can be unpredictable. Typically, ARMs offer borrowers an initial interest rate that's much lower than rates available for fixed-rate loans. As a result, it's not uncommon for homeowners to initiate a home loan as an ARM and ref🌊inance into a fixed-rate mortgage at a later date.

Since refinancing is essentially paying off one home loan and initiating a new loan, borrowers must be aware of the additional costs associated with refinancing, including closing costs on the new loan. Some lenders offer zero-closing-cost mortgages, for instanc♛e, by covering the closing costs of the mortgage for the borrower and increasing the borrower’s mortgage rate to cover their expenses over time.

The Bottom Line

Refinance waves can occur when mortgage interest rates have falle💃n significantly, leading to a large number of borrowers refinancing their mortgages. Refinance waves can result in homeoꦜwners lowering their monthly payments, paying off their loans sooner, or withdrawing cash from the equity in their homes.